America doesn’t need health care rationing

Experts know that the answer to health costs is regulating what doctors, hospitals and pharma companies can charge

Topics: Business, Health Care, Health care reform, Regulation, Pharma,

America doesn't need health care rationing (Credit: iStockphoto/spxChrome)

Recently the New York Times has published two pieces, one by the journalist Eduardo Porter and one by the investment banker and Obama administration “car czar” Steven Rattner, arguing that America’s health care cost problem requires us to consider rationing the access of American citizens to health care. Although the problem they address is real, these New York Times essays ignore the most important cause of America’s health care cost inflation—the overcharging of non-elderly Americans, by physicians, hospitals and drug companies, for routine medical goods and services that are much cheaper in every other country.  In addition to ignoring the major problem, the two authors fail to mention the necessary solution—price controls imposed by government on America’s grossly overcompensated medical providers.

The central problem with health care in the U.S. is not that it spends too much in general, or too much on the elderly in particular, but that it spends far more than other industrial democracies on similar health care for similar results.  In 2009, the U.S. spent 17.4 percent of its GDP on health care, much more than the next highest spender among the OECD, the Netherlands, at 12 percent.  And the U.S. spends 2.5 times more per person on health care than the average OECD country.

The growth of U.S. health care costs, beyond the natural increase that would be caused by the aging of the population and economic growth, may pose a long-term threat to public and private budgets.  But scary long-term budget projections should be viewed skeptically, particularly when brandished by self-styled “deficit hawks” who want to cut government anyway because of conservative or libertarian ideology.  Long-term budget projections are always dubious.  Budget projections are easily rendered quaint by radical cost savings from technological innovation, for example.  Budget experts in the 1960s, failing to foresee Lasik surgery technology, might have predicted that widespread eye surgery for Americans would have bankrupted the U.S.  Moreover, excessive health cost growth has slowed in recent years.



Rather than direct the readers of the New York Times to relevant studies by health care experts who know what they are talking about, Eduardo Porter, a journalist who studied physics, cites a 2012 Chicago Booth business school poll of economists:

The federal government’s spending on health care consumes 4.8 percent of the nation’s economic production and is expected to eat up 9.2 percent in 25 years, according to estimates from the Congressional Budget Office. A vast majority of economists agree that restoring a sustainable budget will mean either cuts in Medicare and Medicaid or a tax increase on the middle class.

Let us set aside the question of whether the projected increase in health care’s share of federal spending of a mere 4.4 percent over a quarter of a century is an apocalyptic crisis rather than a nuisance.  It is safe to assume that few if any of the economists whom Porter cites as authorities on the choices for dealing with health care cost growth in the U.S. are familiar with detailed international studies of variations in health care prices.  That being the case, the opinion of “a vast majority of economists” on medical industry issues deserves to be given no more weight than the equally ill-informed opinions of a “vast majority” of hair stylists or truck drivers.

Before we defer to amateurs outside of their fields of expertise who opine that we need to ration health care in the U.S. for the elderly and everyone else, we should turn for advice to genuine experts who have studied why U.S. health care costs are out of line compared to those in other countries.   According to these experts, the problem with the U.S. health care system is not that Americans use too much health care compared to other countries, but that Americans, as consumers and taxpayers, pay far more than people in other countries for the same medical goods and services, such as doctors’ fees, hospital fees, and drug prices.

The most thorough recent cross-national comparison of health care prices is “Health Care at a Glance 2011” published by the OECD.

The OECD’s Matthias Rumpf explained the study’s conclusions to PBS:

High spending by the U.S. on health must either be because the price of health care is higher than in other countries, or else because it provides more health activities than other countries, or a combination of the two. Evidence suggests that both factors are important, but particularly prices. The same set of hospital interventions (including the normal delivery of a baby, a Caesarean section, a hip or knee replacement, etc.) cost 60 percent more in the United States than in a selection of other countries. Similarly, 50 high-selling pharmaceuticals cost 60 percent more in the United States than in Europe. …Overall, therefore, high prices are the main reason for high health care spending in the United States.

From what doctors are paid to what hospitals and drug companies charge, medical prices tend to be higher in the U.S. than abroad.

Doctors’ fees.  According to Miriam Laugesen and Sherry Glied in Health Affairs in 2011, U.S. primary care physicians receive higher fees than foreign primary care doctors for office visits.

In part this is because of a shortage of primary care physicians in the U.S., where doctors prefer to reap even more outsized incomes as specialists.  Writing in the Journal of Economic Perspectives in spring 2011, D.M. Cutler and D.P. Ly, both of Harvard, observe:  “The average U.S. specialist physician earns $230,000 annually—78 percent above average in other countries…Primary care physicians earn less (they earn $161,000 on average), but the same percentage more than their peers in other countries.”

Hospital fees.  According to the OECD, the U.S. spends 60 percent more on hospitalization than other, comparable countries. The 2011 Comparative Price Report by the International Federation of Health Plans, an association of insurers in 30 countries, found that the U.S. led the world in hospital expenses.  The average cost for a stay in the hospital in the U.S. was $15,734.  In Germany, the next most expensive country in the world, it was only $5,004.

Drug prices.   For the 30 most commonly-prescribed prescription drugs, Americans pay one-third more than Canadians and Germans and nearly twice as much as the inhabitants of the UK, Australia, New Zealand, France and the Netherlands.  The 2010 report by the International Federation of Health Plans showed that on average the prescription drug Plavix is sold in the U.S. at $152, compared to $57 in the UK and $76 in Canada, while Lipitor, which costs less than $40 in the UK and Canada, costs $129 in the U.S.

Why do otherwise similar countries enjoy not only lower overall health care spending as a percentage of the economy than the U.S., but also lower prices for identical medical goods and services?  In their New York Times contributions, both Porter and Rattner emphasize rationing as a method of cost containment.  Porter writes:

While it is reasonable for politicians to shy away from rationing — especially when voters believe no expense should be spared to save a human life — if the experience of other countries serves as precedent, they will probably get there sooner or later. In Britain, the National Institute for Health and Clinical Excellence determines what therapies will be covered by the National Health Service. It generally recommends against paying for a therapy that costs more than $31,000 to $47,000 for each year of life gained, adjusted for quality…

Similar systems exist in many countries, including Australia and New Zealand, where the government decided not to pay for a universal vaccine against pneumococcal disease until its price fell to 25,000 New Zealand dollars (about $20,000) per quality-adjusted life year.

Similarly, Rattner points to rationing systems abroad:

Many countries whose health care systems are regularly extolled — including Canada, Australia and New Zealand — have systems for rationing care.

Take Britain, which provides universal coverage with spending at proportionately almost half of American levels. Its National Institute for Health and Clinical Excellence uses a complex quality-adjusted life year system to put an explicit value (up to about $48,000 per year) on a treatment’s ability to extend life.

But such rationing, while it may be defended in some cases, is irrelevant to the main problem in the United States.  The main problem, as we have seen, is that ordinary medical goods and services for Americans who are not elderly and are not at the end of life are grossly overpriced by international standards.

While many have argued that our fee-for-service system rewards excessive use of some diagnostic and medical procedures, this is not the major reason for the cost differential between the U.S. health care system and all others.   For example, in the case of hip and knee replacements, which are almost entirely for the elderly, the U.S., with only 184 operations per 100,000 residents, lags behind Germany (296), Switzerland (287), Denmark (236), Norway (232), France (224), Sweden (214), Netherlands (213), and the UK (194).  And yet all of those countries spend much less on overall health care than the U.S.  Even though they prescribe fewer hip replacements, America’s orthopedic physicians are paid more for this procedure than their counterparts in the UK, Canada, Australia, Germany and France, according to Miriam Laugesen and Sherry Glied in Health Affairs.

It is true that the U.S. leads the world in advanced diagnostic tests, assigning 91.2 per 1000, compared to 55.2 in France and 43.0 in Canada.  But even here the problem is more one of excessive American prices than excessive American usage.  The same MRI scan costs $1,081 in the U.S. but only $599 in Germany and a mere $281 in France.  American medical providers are also grossly overcharging American patients and insurers and taxpayers for CT scans, which cost $510 in the U.S. but $272 in Germany, $141 in France—and a measly $122 in Canada.

Yes, that’s right—the American medical industry charges about five times as much as the Canadian health industry for doing an identical MRI procedure.  If Americans use twice as many MRIs, but pay five times what Canadians pay for each MRI, shouldn’t we be asking why MRI’s cost so much in the US and so little in Canada, rather than concluding that we need to ration the access of Americans to MRIs?

Even as they focus on rationing, Porter and Rattner ignore the primary method by which other nations provide a similar quantity of health care goods and services at far lower prices:  “all-payer regulation.”  In all-payer regulation, every few years the government bargains with representatives of health care providers—doctors, hospitals and pharma companies—to set prices for medical goods and services.  The fee schedule that results from the negotiations is binding on all providers, public or private.  All-payer regulation keeps prices down, in otherwise different health care delivery systems, including the Swiss system based on individual mandates to buy (nonprofit) private insurance and Japan’s fee-for-service system.

In America’s public Medicare/Medicaid system, fee schedules already restrain costs.  But in America’s private health care sector, medical providers are allowed to charge different prices for the same good or service to different customers or insurers, in order to maintain predetermined incomes or sales revenues far higher than those enjoyed by physicians, hospitals and drug companies in other nations.  Of this “cost shifting,” Robert Murray in Health Affairs notes:

The economist Uwe Reinhardt and others have argued that such price discrimination is not in the public interest, and that an all-payer system—as in Japan, Germany, and several other nations—would be more equitable, efficient, and potentially effective at reining in spending growth.  Such a system is not completely foreign to the U.S. The state of Maryland has operated an all-payer system for hospitals since 1977, and has seen costs per admission rise slower than the national average.

The Japanese example undercuts the argument that one solution to excessive American health care costs involves moving away from fee-for-service compensation to providers, which allegedly incentivizes overtreatment.  According to David Squires in a cross-national study for the Commonwealth Fund published in May 2012:

As the lowest-spending nation in this study, Japan offers an interesting contrast to the U.S. In some ways, the two countries’ health systems share similar features. Japan operates a fee-for-service system, characterized by unrestricted access to specialists and hospitals. Advanced medical technology also appears to be widely available, with Japan having the most CT scanners and MRI machines among the countries in this study. Yet health spending in Japan as a share of GDP has increased by only 2 percentage points in the past three decades, compared with an increase of more than 8 percentage points in the U.S. over the same period.

Notably, the Japanese do not restrain spending by restricting access; rather, they do so by aggressively regulating health care prices. [Emphasis added]. Every two years, a panel of experts uses volume projections to revise the national fee schedule, which determines the maximum prices for nearly all health services, to keep total health spending growth within a target set by the central government. Providers’ profitability is also monitored, and when certain categories of providers (e.g., acute care hospitals or ambulatory specialists) demonstrate significantly greater profitability than the average, prices for their services are reduced. Despite such overt price controls, the results are hard to dispute—the Japanese enjoy the longest life expectancy in the world.

Like physicians’ fees and hospital fees, drug prices are kept reasonable by government price regulation in every advanced country except the United States.  Other governments tell pharma companies how much they can charge for what they sell inside their national borders.  According to a report by the U.S. Commerce Department:

By contrast [with the United States], in the Organization for Economic Cooperation and Development (OECD) countries studied in this report, governments have relied heavily on government fiat rather than competition to set prices, lowering drug spending through price controls applied to new and old drugs alike…The study examined the drug price regulatory systems of 11 OECD countries and found  that all rely on some form of price controls to limit spending on pharmaceuticals….For the countries analyzed, the study showed that aggregate pharmaceutical prices were 18 to 67 percent less than U.S. prices, depending on the country.

As the old saying goes, you are entitled to your own opinion, but not your own facts.  The central problem of the excessive cost of health care in the U.S. is not over-use of the health care system, including excessive end-of-life care by the elderly, nor would reducing the access of Americans to health care by rationing address the central problem.

The central problem of U.S. health care is the fact that prices for identical, mostly routine medical goods and services for non-elderly Americans—doctors’ visits, routine diagnostic procedures, ordinary hospital stays and frequently-prescribed drugs—are far higher in the U.S. than in other OECD countries because America’s medical industry uses its market power to extract “rents” or superprofits from the public.  To put it simply, the U.S. has a predatory medical industry that is gouging Americans both as consumers and taxpayers.

Because the market for most medical goods and services is inherently monopolistic or oligopolistic, the conservative panacea of greater market competition cannot work to reduce costs, except in minor fields like dentistry and eyewear.

The solution to the problem of excessive medical prices and bloated medical industry profits is the tried and tested solution adopted by all other advanced economies, including nations with pro-market, anti-statist traditions like those of the U.S., such as Switzerland: government regulation of what doctors, hospitals and pharma companies are allowed to charge.  On this, the genuine experts in health care finance are all but unanimous.  Any discussion of health care rationing in the U.S. should be postponed until the federal government, every few years, publishes fee schedules that are binding on public and private medical providers alike, forcing medical prices down to the levels found in the rest of the developed world.

Michael Lind is the author of Land of Promise: An Economic History of the United States and co-founder of the New America Foundation.

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